A business law blog published by the business lawyers at AttorneyBritt - Gary L. Britt, CPA, J.D. Commentary and information regarding the laws and regulations applicable to individuals, corporations, partnerships, and limited liability companies (LLCs); as they relate to the myriad of business transactions, contracts, and agreements every business owner, shareholder, member, physician, and/or health care provider must consider.

Tuesday, February 3, 2015

Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

WASHINGTON — The Internal Revenue Service today said using abusive
tax shelters and structures to avoid paying taxes continues to be a
problem and remains on its annual list of tax scams known as the “Dirty
Dozen” for the 2015 filing season.
"The IRS is committed to stopping complex tax avoidance schemes and
the people who create and sell them," said IRS Commissioner John
Koskinen. "The vast majority of taxpayers pay their fair share, and we
are warning everyone to watch out for people peddling tax shelters that
sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams
that taxpayers may encounter anytime but many of these schemes peak
during filing season as people prepare their returns or hire people to
help with their taxes.
Illegal scams can lead to significant penalties and interest and
possible criminal prosecution. IRS Criminal Investigation works closely
with the Department of Justice (DOJ) to shutdown scams and prosecute the
criminals behind them.

Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of abusive
domestic and foreign trust arrangements into sophisticated strategies
that take advantage of the financial secrecy laws of some foreign
jurisdictions and the availability of credit/debit cards issued from
offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally
coordinated program to combat these abusive tax schemes. CI's primary
focus is on the identification and investigation of the tax scheme
promoters as well as those who play a substantial or integral role in
facilitating, aiding, assisting, or furthering the abusive tax scheme,
such as accountants or lawyers. Just as important is the investigation
of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program
encompasses violations of the Internal Revenue Code (IRC) and related
statutes where multiple flow-through entities are used as an integral
part of the taxpayer's scheme to evade taxes. These schemes are
characterized by the use of Limited Liability Companies (LLCs), Limited
Liability Partnerships (LLPs), International Business Companies (IBCs),
foreign financial accounts, offshore credit/debit cards and other
similar instruments. The schemes are usually complex involving
multi-layer transactions for the purpose of concealing the true nature
and ownership of the taxable income and/or assets.
Whether something is “too good to be true” is important to consider
before buying into any arrangements that promise to “eliminate” or
“substantially reduce” your tax liability. If an arrangement uses
unnecessary steps or a form that does not match its substance, then that
arrangement is an abusive scheme. Another thing to remember is that
the promoters of abusive tax schemes often employ financial instruments
in their schemes; however, the instruments are used for improper
purposes including the facilitation of tax evasion.

Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They are
highlighted here because unscrupulous promoters continue to urge
taxpayers to transfer large amounts of assets into trusts. These assets
include not only cash and investments, but also successful on-going
businesses. There are legitimate uses of trusts in tax and estate
planning, but the IRS commonly sees highly questionable transactions.
These transactions promise reduced taxable income, inflated deductions
for personal expenses, reduced (even to zero) self-employment taxes, and
reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring
wealth from one generation to another. Questionable trusts rarely
deliver the tax benefits promised and are used primarily as a means of
avoiding income tax liability and hiding assets from creditors,
including the IRS.

IRS personnel continue to see an increase in the improper use of
private annuity trusts and foreign trusts to shift income and deduct
personal expenses, as well as to avoid estate transfer taxes. As with
other arrangements, taxpayers should seek the advice of a trusted
professional before entering a trust arrangement.

Captive Insurance
Another abuse involving a legitimate tax structure involves certain
small or “micro” captive insurance companies. Tax law allows businesses
to create “captive” insurance companies to enable those businesses to
protect against certain risks. The insured claims deductions under the
tax code for premiums paid for the insurance policies while the premiums
end up with the captive insurance company owned by same owners of the
insured or family members.

The captive insurance company, in turn, can elect under a separate
section of the tax code to be taxed only on the investment income from
the pool of premiums, excluding taxable income of up to $1.2 million per
year in net written premiums.
In the abusive structure, unscrupulous promoters persuade closely
held entities to participate in this scheme by assisting entities to
create captive insurance companies onshore or offshore, drafting
organizational documents and preparing initial filings to state
insurance authorities and the IRS. The promoters assist with creating
and “selling” to the entities often times poorly drafted “insurance”
binders and policies to cover ordinary business risks or esoteric,
implausible risks for exorbitant “premiums,” while maintaining their
economical commercial coverage with traditional insurers.
Total amounts of annual premiums often equal the amount of deductions
business entities need to reduce income for the year; or, for a wealthy
entity, total premiums amount to $1.2 million annually to take full
advantage of the Code provision. Underwriting and actuarial
substantiation for the insurance premiums paid are either missing or
insufficient. The promoters manage the entities’ captive insurance
companies year after year for hefty fees, assisting taxpayers
unsophisticated in insurance to continue the charade.

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